The Department of Labor (DOL) is reviewing its position on ESG investing and whether cryptocurrency is an appropriate investment for retirement plans.
ESG Rule
The review of the ESG rule was not unexpected. The first Trump Administration passed a more stringent ESG rule, stating that only ‘pecuniary’ factors should be considered when fiduciaries make investment decisions for a plan. That rule also clearly stated that ESG investments could not be used as a plan’s default investment alternative. The Biden DOL indicated that they would not enforce the Trump-era ESG rule and then published a new, more lenient rule in 2023.
The 2023 ESG rule does allow a fiduciary to consider ESG factors when selecting investments, including the plan’s default option. While ESG factors can be considered, fiduciaries must still base decisions on a risk and reward analysis and demonstrate a prudent selection process. The rule was challenged in court by 26 Republican attorneys general. Earlier this year, the judge upheld the rule, noting that ERISA does not specifically forbid the use of ESG factors, the rule does not subordinate financial factors to ESG considerations, and the use of ESG factors is optional.
The attorneys general have appealed this decision to the Fifth Circuit Court of Appeals. Similar to the DOL’s actions related to the fiduciary rule, they have asked the court to pause the litigation while they review the case and their options. In their request, the DOL specifically noted that their review will include consideration of rescinding the rule altogether.
Cryptocurrency in Retirement Plans
The second action was to rescind 2022 guidance related to offering direct access to cryptocurrency within a retirement plan. The 2022 guidance cautioned plan fiduciaries to exercise extreme care before adding cryptocurrency to a retirement plan investment menu. That notice indicated the DOL’s concerns related to the prudence of exposing participants to direct access to cryptocurrency investments or other products tied to cryptocurrency returns. The notice indicated the DOL’s belief, at that time, that these investments presented significant risks of fraud, theft, and loss.
The 2022 guidance did not prevent cryptocurrency investment in retirement plans but did indicate that those investments may be subject to additional scrutiny by the DOL. Rescinding the rule suggests a more neutral approach that does not target cryptocurrency investments for increased DOL scrutiny.
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